Amazon Reports First Full-Year Profit

By SAUL HANSELL

Published: January 28, 2004

Sales that were better than expected, buoyed by a falling dollar that helped lift results overseas, led Amazon.com to earn $73 million in the fourth quarter, giving the company its first full-year profit.

But shares of Amazon, the once-struggling online retailer that has secured a position as one of the best-known brand names on the Internet, fell sharply in after-hours trading yesterday as investors worried that the company's price-cutting strategy would erode its long-term profit potential.

The company argued that lower prices would ultimately make for higher profits.

"You should expect to see pressure on gross margins," Thomas J. Szkutak, the company's chief financial officer, said in a conference call with investors. "We view that as a great investment in the business."

He pointed out that while gross margins - sales minus the cost of goods sold, shipping and some other costs - were declining, the company's operating profit as a share of its overall sales was increasing.

The profit of $73 million, or 17 cents a share, was up from $3 million a year ago. Excluding some charges related to its debt, stock compensation and other items, Amazon earned $125 million, a 67 percent increase. That works out to 29 cents a share, matching the average forecast from analysts.

The company earned $35 million for all of 2003, its first full-year profit since it began operations in 1995. It lost $149 million in 2002.

Amazon said its sales in the quarter were $1.95 billion, up 36 percent. That was well above Wall Street's expectations and the company's own forecast of $1.76 billion to $1.91 billion.

The falling dollar, which increased earnings from overseas sales, added $98 million to Amazon's revenue. But since foreign costs increased as well, currency fluctuations ended up adding $4 million to the company's bottom line.

Amazon sharply increased its forecast for 2004. It now expects revenue of $6.2 billion to $6.7 billion, an increase of 18 percent to 27 percent.

International sales continued to be Amazon's biggest area of growth. Sales in Europe and Japan increased by 74 percent, to $804 million in the quarter. Sales in North America grew by 18 percent, to $1.14 billion.

Analysts noted that the company was continuing to fight to reduce its dependence on sales of items like books, music and video, its first and still by far its largest product categories.

In North America, such sales in the fourth quarter were $751 million, up 16 percent. Sales of electronics and general merchandise - including its commissions from other merchants selling goods like apparel and food through its Web site - were $353 million, up 22 percent. Excluding toys and baby goods, that category grew 30 percent. In the third quarter, Amazon sold its toy catalog business, making comparisons with 2002 difficult.

Anthony Noto, an analyst with Goldman Sachs , said that the electronics and merchandise category seemed to be slowing down for Amazon. In the third quarter, for example, sales grew at a 35 percent pace. Amazon's price-cutting strategy is much more difficult to carry out successfully in these areas than in books, music and video. Electronics, Mr. Noto said, was already highly price-competitive. And Amazon does not control prices when it presents goods sold by other merchants.

"The question remains how big can they be outside of books, music and video," Mr. Noto said.

Amazon's shares fell $2.05, to $53.61, after the company released its results at the end of the regular trading session.

Amazon also said that it had redeemed $150 million of its long-term debt. The company redeemed $464 million of debt in 2003. That leaves it with debt of $1.75 billion.

Amazon said its board had authorized it to buy back as much as another $500 million in debt. At year-end, it had $1.4 billion in cash and securities, up from $1.3 billion a year earlier.

The company said it would increase its spending on technology for the first time since 2000 as it tries to differentiate itself from rivals.

It also said it would add new types of merchandise this year, but it declined to elaborate.